Secondary Steel

So let me explain what my theorhetical Jeep has in common with the secondary steel market.

For the sake of example lets say I own a 2018 Jeep Grand Cherokee. It’s loaded, an Overland edition stuffed with options and I paid $46,850 for the SUV. At the time I really needed the 4X4 and all of the options with the hard Northeast winters. However these past two winters have shown us no snow.

It’s been warmer than usual and I don’t use the heated seats. I thought I would go fishing and off-roading more but I have kept the Jeep solely on the pavement. It’s too much truck for me and I have buyers remorse plus the payment is close to $600 per month. I need to get rid of this truck but I can’t afford to lose a penny. I want to get paid $46,850, the exact price I paid for it two years ago and that feels reasonable to me and to my bottom line. After all I have a family to answer to!

Now apply this same thinking to steel

This is the state of secondary steel sales in 2020. Maybe it was an overbuy or perhaps a job went away but steel fabricators, steel manufacturers, automotive, steel furniture fabricators all find themselves with vast sums of surplus steel. Millions of pounds of excess steel coils, excess steel sheets and excess steel plate.

The desire to move this steel out and free up not only capital but space in the warehouse strongly exists but it coincides with the stronger idea that the steel, purchased prime, is worth almost exactly what it cost new from the mill. The idea that there is an end user out there that can apply this exact item at this exact time at the exact price that was paid is a painful myth that some companies chase into insolvency.

New leadership and private equity want us to believe that there certainly must be a perfect scenario, a planetary alignment that allows the company to be made whole or near whole with the right buyer. Those with history in the steel business know the simple truth.

Here’s the simple truth

In an environment of wildly fluctuating CRU and unsteady scrap pricing the grim reality is that a loss although imminent may not be as painful as the cost of hoarding and protecting useless inventory while deploying valuable and costly manpower, sales attempts, logistics, warehousing, rejections and the idea that somehow, someway a secondary market can withstand primary level pricing and not implode.

CRU fell $15 across the board today. Economist John Maynard Keynes was quoted as saying “Markets can remain irrational longer than you can remain solvent.” There is another very well-know anonymous saying, “your first loss is your best loss.”

What this means is you are best served taking a small loss before it becomes a larger loss. When a company owns steel and it has become a losing position and the market (CRU or scrap) keeps going against them. It is very difficult to approach the situation with a level head and clear mind. The fear of losing money on prime steel inventory at secondary steel pricing can be the greatest factor in the psychology of steel purchasing. It causes steel supply chain, material managers and purchasing agents to see things irrationally, as they do everything possible not to take a loss.

Take the loss and move forward

This leads to poor decision-making and bad judgment. If possible, try to imagine you are flat instead of in a position to lose. Then ask yourself, if you were flat, would you buy more of this exact steel at today’s prime price? If no, you need to get out, and get out fast. The clarity that is gained from selling large quantities of excess steel inventory is invaluable compared to the extra transaction costs. Don’t worry about a few dollars when thousands are at stake.

You shouldn’t settle for scrap prices

Working at Surplus Metals I have found that we are able to offer valuable advice about the secondary market and specifically your steel. Sometimes it just helps for the supply chain or steel procurement to talk about the steel the same way a person tells their psychologist their problems. In the end, having a seasoned professional in the weeds next to you during battle can make a huge difference in your most difficult steel trading periods, and help you make sure you never return to that place again. We are here to help you move that steel out.